Top Legal Issues Facing the Automotive Industry in 2020 - Prepared by Foley's Automotive Industry Team
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Top Legal Issues Facing the Automotive Industry in 2020 Prepared by Foley’s Automotive Industry Team
Table of Contents
1 THE IMPACT OF EMERGING TECHNOLOGIES ON GLOBAL
AUTOMOTIVE SUPPLY CHAINS
3 2020 ANTITRUST OUTLOOK – ANTITRUST AGENCY DIVERGENCE,
THE STANDARDS DEBATE AND STATE ACTIVISM PRESENT
ENFORCEMENT UNCERTAINTY
6 KEY EMPLOYMENT ISSUES FACING EMPLOYERS IN THE
AUTOMOTIVE INDUSTRY
9 RECENT GOVERNMENT ANNOUNCEMENTS CONFIRM IMPORTANCE OF
INTERNATIONAL REGULATORY COMPLIANCE FOR AUTOMOTIVE COMPANIES
11 WHAT WE KNOW NOW – LESSONS FROM 2019 TO BETTER MANAGE
DATA PRIVACY IN 2020
14 THE USMCA, WITH THE DECEMBER 2019 UPDATES, WILL SOON TAKE
EFFECT. HERE’S WHAT TO EXPECT
19 NHTSA AND MOTOR VEHICLE SAFETY
23 TRENDS IN LEVERAGING AUTOMOTIVE PATENT PORTFOLIOS
25 2020 OUTLOOK FOR AUTOMOTIVE M&A:
WILL THE GOOD TIMES KEEP ROLLING?
27 THE UNSECURED CREDITORS’ COMMITTEE: AN IMPORTANT
PROTECTION FOR SUPPLIERS TO BANKRUPT CUSTOMERS
The Impact of Emerging Technologies on Global
Automotive Supply Chains
By Mark Aiello, Partner and Vanessa Miller, Partner
The intense focus on autonomous vehicles and 3. Address warranty issues promptly. If a warranty issue
electrification we see today shows no signs of slowing down: arises, it is important for the supplier to quickly identify
in the new automotive industry, every company is a tech the root cause(s), implement containment procedures,
company. As these technologies start to move along the and establish clean points. In addition, protocols
supply chain, automotive companies need to address several should be established for handling warranty claims and
analyzing the root causes of dealer repair codes that
important issues:
could implicate the product.
■ Risk-Shifting for Warranty Issues
2. Licensing Strategies to Lower IP Costs
■ Intellectual Property
With a car’s new technology and/or smart features, licensing
■ Cybersecurity and Data Privacy presents an opportunity for OEMs to lower costs by saving
■ Tariffs and Global Commodities Impacting Sourcing on intellectual property development and enforcement.
Licensing also poses certain legal risks. When negotiating
1. Protecting Your Supply Chain a licensing agreement, you should carefully consider
As we begin the shift from human drivers to some level of exclusivity of any licensed feature, ownership of any custom
autonomous driving, managing warranty risks associated modifications to the licensed feature, and ownership of the
with electrical system components and software will be key. data derived from the driver’s use of a vehicle with such a
What follows are some steps automotive suppliers can take feature. A supplier should also use strong confidentiality
to mitigate this risk: and ownership protections for the technology assets, and
specifically address rights for any unique specifications to
1. Warranty risk management must be addressed at the the licensed technology. As new technologies predominate
contracting phase. OEM purchase orders, as well as the industry, the structure of your licensing agreement –
their corresponding terms and conditions, contain highly and the clauses protecting your intellectual property – will
favorable terms for OEM. Traditionally, then, making
become increasingly important.
exceptions and limitations to supplier warranties has
been difficult to negotiate. Yet with integration, new
3. Cybersecurity / Data Privacy
technology, and joint development, suppliers can now
appropriately allocate risk according to responsibility. The global automotive cybersecurity market is expected to
Specifications for components or systems should be grow at an unprecedented rate, from $1.34 billion in 2018
clearly set forth in contract documents, and efforts to $5.77 billion by 2025.1 Responding to a recent survey
should be made to limit or disclaim any inapplicable from Synopsys and the Society of Automotive Engineers
warranties, including warranties outside the scope of (SAE) International, manufacturers say that it is “likely”
design or integration responsibility. or “very likely” that malicious attacks on their software or
2. Parties must clearly document responsibilities for components will occur within the next 12 months.2
testing and validation. Automotive suppliers should
document their responsibilities for testing electrical
1 https://www.researchandmarkets.com/reports/4659475/automotive-
system components, systems, and networks, while also cyber-security-market-by-form-in
clarifying the limits of their responsibility for such testing
2 SAE / Synopsis (prepared by Ponemon Institute) – Securing the
– at the component, system, and vehicle level. Modern Vehicle | https://www.synopsys.com/content/dam/synopsys/sig-
assets/reports/securing-the-modern-vehicle.pdf
© 2020 Foley & Lardner LLP | 1
Smart technology also increases the amount of personal of semiconductors. Increases in demand, coupled with
information collected by the car, making strong data protection capacity limitations and tariffs, are thus creating shortages of
paramount. Doing so entails robust policies in connection with key electronic components for automotive assemblies.
the design goals and use of the products. These policies or Faced with mostly fixed-price, sole-source requirements
standards should consider, among other things, industry best contracts for specially manufactured goods, automotive
practices, such as those published by SAE.3 manufacturers have employed different strategies in an
Breach of applicable agreements, documentation of attempt to gain leverage and force backwards-looking pricing
root cause(s) and documentary evidence supporting the negotiations. Unfortunately, legal arguments that attempt
damages are critical should litigation arise. to rely on these contracts’ force majeure provisions or the
doctrine of commercial impracticability have
4. Navigating Tariffs and Volatile Commodities Markets proven unsuccessful.
In addition to the above considerations, automotive Looking forward, automotive companies have a number of
companies need to employ a strategy to navigate fluctuating avenues they can pursue to shift tariff risk. For example,
commodities markets, tariffs and other government parties to a supply contract may specifically assign the tariff
regulations involving new technologies. risk to the seller, by listing the price as inclusive of all “taxes,
imports, duties, and tariffs.” Alternatively, the parties to a
This means analyzing their existing contracts against supply contract may simply require the buyer to pay any
the backdrop of the contracts’ dynamics, looking both tariffs. Other supply chain contracts may include a more
upstream and downstream in their supply chain. For open-ended pricing provision, which requires the parties to
example, leverage and bargaining power will vary depending engage in good faith negotiations regarding price increases if
upon whether the company is a buyer or seller, where the tariffs are imposed.
company falls in the tiered supply chain (OEM—Tier 1—
More complex and longer-term strategies employed by
Tier 2), whether the component is specially manufactured,
automotive companies include indexing and hedging
or whether the contract is a single-source requirements
strategies, or considering whether a machining function
contract. The quantities at hand will further affect such
can be performed by a third party (or at a facility that is not
companies’ leverage and bargaining power. This is true not
impacted by the tariffs). These, of course, are strategies that
just for the product being impacted by tariffs or government
need to be analyzed by a cross-functional team at
regulations, but also for the program order in years past, as
the company.
well as other products with the same customer/supplier.
According to the Electronic Components Industry
Association4: “In today’s digital world, nearly every industry
utilizes electronic components and the supply chain for
such components is globally interconnected and complex.
As a result, the imposition of tariffs on the electronic
components will have global consequences for businesses
and consumers alike, adding friction and costs to the supply
chain that can hinder economic growth for all involved.”
An additional cause of bottlenecks in many automotive
manufacturers’ supply chains is the worldwide shortage
3 Society of Automotive Engineers. (2016). SAE Standard J 3061:
Cybersecurity Guidebook for Cyber-Physical Vehicle Systems. (Web
page). Warrendale, PA: Author. Available at http:// standards.sae.org/
wip/j3061/
4 https://www.ecianow.org/stats-insights
© 2020 Foley & Lardner LLP | 2
2020 Antitrust Outlook – Antitrust Agency
Divergence, the Standards Debate and State
Activism Present Enforcement Uncertainty
By Greg Neppl, Partner
The antitrust outlook in the United States is marked by 1. DOJ Challenged Time Warner/AT&T
uncertainty. This article identifies some issues to watch. The first major merger review for Makan Delrahim to
consider as DOJ Assistant Attorney General for Antitrust
Trump Administration Surprises was that of Time Warner/AT&T. DOJ sued to block
Historically, U.S. antitrust enforcement has been marked this vertical deal in November 2017, at least in part based
more by continuity than by abrupt change. During the past on Delrahim’s view that behavioral relief, historically
few decades, we saw an evolution away from blanket rules accepted by DOJ (and FTC) to address vertical merger
of per se legality or illegality under federal law (e.g., resale concerns, should be highly disfavored. Following a bench
price maintenance and inflexible merger standards), a greater trial on the antitrust merits, Judge Richard Leon denied
emphasis on economic analysis of likely competitive effects, DOJ’s injunction request. The D.C. Circuit affirmed Judge
and an attempt to strike a balance between overly aggressive Leon’s decision in February 2019.
enforcement (which inhibits potentially procompetitive conduct
This litigation outcome is relevant to the prospects for vertical
benefiting consumer welfare) and overly lenient enforcement
merger challenges by DOJ and FTC in the future. In a related
(which risks adverse consumer welfare consequences).
event, on January 10, 2020, DOJ and FTC released for public
We are now three years into the Trump administration, comment draft Vertical Merger Guidelines, describing the
however, and we have seen some surprising DOJ (Antitrust “principal analytical techniques, practices and enforcement
Division) enforcement priorities, efforts and outcomes. policy” of the agencies with regard to vertical mergers. These
We have also seen some surprising agency divergence on guidelines, once adopted, will replace DOJ’s Non-Horizontal
both standard essential patent issues and (potentially) the Merger Guidelines from 1984. The draft Vertical Merger
standards for merger reviews. Finally, we have seen unusual Guidelines largely reflect current agency thinking and practice,
activism by state attorneys general and a willingness by DOJ and therefore are not very surprising. The draft Vertical Merger
to arbitrate the primary issue (market definition) in most Guidelines do not, however, address the agencies’ approach
merger reviews. Below we discuss some implications of to remedies (including behavioral relief) in vertical mergers, an
these surprises. important issue for businesses and antitrust practitioners.
© 2020 Foley & Lardner LLP | 3
2. DOJ and FTC Diverge on the Licensing of Standard and Bernie Sanders. For example, in 2017, Sens. Warren and
Essential Patents Chuck Schumer (and others) rolled out their “Better Deal”
DOJ has publicly criticized its sister antitrust enforcement platform for the 2018 congressional elections. Sen. Sanders
agency — the FTC — in the FTC’s successful district court more recently proposed antitrust enforcement reforms that
challenge of Qualcomm’s licensing practices relating to eclipse that “Better Deal” platform. Both propose, among
standard essential patents addressing 4G transmission other things, to replace the consumer welfare standard
technologies. Such a public disagreement between FTC for merger reviews with a broader standard that considers
and DOJ on an antitrust policy question is very unusual. various merger impacts unhinged to “competition” or
Qualcomm has appealed the May 2019 decision of the U.S. “competitive effects,” a change that could substantially alter
District Court for the Northern District of California to the the predictability of merger enforcement by introducing a
Ninth Circuit. potentially broad range of policy considerations.
While DOJ filed a “Statement of Interest” with the Ninth AAG Delrahim has rejected the use of antitrust law to
Circuit in July 2019, arguing that the district court decision address political and social goals advocated by what is called
“threatens competition, innovation, and national security,” the “hipster antitrust” movement, while acknowledging that
critics of Qualcomm’s licensing practices include trade “consumer welfare” includes non-price considerations such
groups representing the U.S. units of various automobile as innovation and quality. Meanwhile, FTC Chairman Joe
manufacturers such as BMW, Ford, GM and Toyota, as well Simons said recently that the FTC is taking “a fresh look”
as Continental, Denso and Intel. at the consumer welfare standard. The extent to which
This Ninth Circuit appeal raises an important policy Delrahim and Simons may diverge on this issue is unclear,
question regarding the antitrust treatment of certain but certainly worth watching in 2020. If an advocate
IP licensing practices, with important implications for of replacing the consumer welfare standard is elected
automotive industry participants. president in 2020, the potential impact on merger reviews
would be even more significant.
3. Potential Agency Divergence on Merger
Review Standards 4. State Attorney General Activism
Criticism of antitrust enforcement efforts undertaken by federal DOJ (and various state AGs) reached a settlement in the
antitrust agencies – the FTC and DOJ (Antitrust Division) – is proposed Sprint/T-Mobile merger in July 2019, with the
nothing new. Reasonable minds can differ as to whether Tunney Act review of DOJ’s Proposed Final Judgment
a particular merger or conduct challenge by the agencies pending before D.C. District Court Judge Timothy Kelly.
advances the established goal of U.S. antitrust enforcement: to FCC Chairman Ajit Pai had previously announced his
protect competition for the benefit of consumers. support for the combination (subject to conditions) in May
2019. Nevertheless, other state AGs (led by NY and CA) are
At the same time, however, there is a broader debate over
challenging the transaction in the Southern District of
the scope of that established goal and whether the objectives
New York. A trial of the state AG matter concluded on
of antitrust enforcement should change and the tools of
December 20, 2019.
enforcement should be expanded. While this debate is
not new either, it often seems to accelerate in advance of Antitrust opposition by state AGs – at least in the form of an
elections, as presidential (and congressional) candidates independent legal challenge in court – to a merger approved
sometimes embrace antitrust enforcement “reform” as a at the federal level by DOJ or FTC is unusual. This state AG
campaign issue. As antitrust enforcement policy can dovetail challenge raises at least the possibility of one federal court
with broader political themes – including populism, “big approving a DOJ Proposed Final Judgment as consistent
business” power, wealth inequality, labor protections, national with the “public interest” standard under the Tunney Act,
security, and data privacy – this should come as no surprise. while another federal court enjoins the transaction (perhaps
on antitrust grounds not even asserted by DOJ). At the very
The most recent and aggressive “reform” proposals have
least, the parallel state AG challenge here may increase the
been advocated by presidential candidates Elizabeth Warren
© 2020 Foley & Lardner LLP | 4
probability in future transactions that one or more state AGs 6. DOJ’s Auto Parts Investigation and Antitrust
– not satisfied with a DOJ or FTC settlement agreement – will Compliance Programs
seek independently to enjoin the transaction, thus exposing Lastly, we should not forget the lessons of DOJ’s long-
transactions to greater timing and deal risk. Merger reviews running investigation of auto parts suppliers, the largest
in the EU, in contrast, are conducted either by the EC (DG criminal investigation ever pursued by DOJ’s Antitrust
COMP) or EU member states, but not at both Division, which resulted in charges against some 48
levels simultaneously. companies and yielded almost $3 billion in criminal fines.
Settlements of class action and other private plaintiff claims
5. DOJ’s Willingness to Arbitrate Market Definition have reportedly exceeded $1 billion.
In September 2019, DOJ sued to block the proposed
acquisition of Aleris Corp. by Novelis Inc., two producers of An effective antitrust compliance program, in addition to
aluminum for automobile manufacturing. Surprisingly, for detecting and deterring cartel conduct, now brings additional
the first time, DOJ agreed with the parties to use binding benefits. While DOJ has historically not given credit for
arbitration to define the relevant product market. Whether antitrust compliance programs in making charging decisions
DOJ (or FTC) will arbitrate this key antitrust issue in other and sentencing recommendations, it announced changes
merger challenges is unknown, although, as AAG Delrahim to both policies in July 2019. These long-needed changes
has noted, arbitration could well allow (at least some) merger increase the legal benefits of implementing an effective
challenges to be resolved more “efficiently and effectively.” antitrust compliance program.
© 2020 Foley & Lardner LLP | 5
Key Employment Issues Facing Employers in the
Automotive Industry
By Jeff Kopp, Partner and Felicia O’Connor, Associate
As we begin a new decade, automotive companies continue Michigan, have legalized marijuana for recreational use as well
to face complicated employment law issues. These include as medical use. However, guidelines for how employers must
the changing landscape of marijuana laws and their impact deal with these laws are less clear.
on employment, the implications of new minimum wage
A few states, such as Connecticut, have medical marijuana
laws, and finally, National Labor Relations Board (NLRB)
laws that include an anti-retaliation provision, which
changes that affect both unionized and non-unionized
prohibits employers from terminating an employee for
employers. Anticipating changes and embracing proactive
their status as a medical marijuana cardholder or for using
leadership will help employers minimize risks of becoming
marijuana in compliance with the state law.7 Each year,
caught up in time-consuming and expensive litigation.
more states are added to the list that permit marijuana use
1. Marijuana in the Workplace – A Changing and in some capacity and each state law is unique. Employers
Complicated Legal Landscape must determine the parameters of marijuana-related laws in
Simply put, legislation legalizing recreational marijuana is the states in which they operate. Disconnects exist between
everywhere – and more and more states are heading in that what medical marijuana patients and recreational marijuana
direction. In the automotive industry, where many jobs involve users believe regarding their rights and the actual scope of
operating heavy equipment and manufacturing safety-related employees’ rights with respect to marijuana use inside and
products, drug use in the workplace is a serious concern outside of the work environment.
for employers. The legal landscape of marijuana use is Additionally, employers must understand the intersection
complicated and frequently changing. Although marijuana between the Americans with Disabilities Act (ADA) and
has become legal for medical purposes and/or recreational medical marijuana usage. While employers are never
use in many states, it remains a Schedule 1 substance under required to permit on-the-job marijuana usage, they are
the federal Controlled Substances Act.5 Such substances, at required to reasonably accommodate an employee’s
least from the federal perspective, have no currently accepted qualifying disability under the ADA and must still engage an
medical use, and a high potential for abuse. The conflict employee in the usual interactive process under the ADA.
between state and federal law with respect to marijuana leads When adverse employment decisions appear too closely
to a host of legal and practical implications for employers as related to the disability itself, rather than marijuana usage,
marijuana use becomes more common in states that have courts have reacted negatively.8 In addition, mainstream
legalized it in some form. attitudes toward marijuana usage are changing. Moral
opposition to marijuana use will not be a good defense for
The first and most important complicating factor for multi- an employer if a disabled individual seeks relief from legally
state automotive employers is that state laws differ and are using marijuana under state law.
changing frequently. Many states permit marijuana usage for
medical purposes.6 More recently, several states, including A complicating factor that overlays the issue of marijuana
usage in the workplace is the lack of any scientifically
proven real-time test for impairment. There are a myriad of
5 https://www.dea.gov/drug-scheduling; https://www.deadiversion.
usdoj.gov/schedules/orangebook/c_cs_alpha.pdf 7 Connecticut General Statutes, Chapter 420f, Section 21a-408p,
6 All states with the exception of Idaho, South Dakota, Nebraska, and 8 See e.g. EEOC v The Pines of Clarkston, No. 13-CV-14076 (E.D.
Kansas have some form of cannabis access program. Mich. April 29, 2015)
© 2020 Foley & Lardner LLP | 6
methods for testing marijuana usage but the most commonly 2. Implications of Increases in Minimum Wage
used methods, urinalysis and blood testing, do not indicate Minimum wage changes are also on the horizon. On March
whether the testing subject is impaired at the time of the 29, 2020, Michigan’s minimum wage will increase from
test. New technology for breath testing claims to be able to
$9.25 to $9.45 per hour.10 In that state, and others subject
show impairment but has a much shorter window of time
to an increase in minimum wage, the implications reach
by which the test must be taken and has yet to be proven
beyond pure compliance with the law. It goes without saying
reliable in detecting impairment.9 As a result, a positive drug
that employers should research possible minimum wage
test does not necessarily demonstrate than an employee is
increases in the states where they operate (if they pay
impaired at work or has used marijuana while working.
employees at the current minimum wage) in order to stay
Additional considerations include the new laws’ intersection compliant with the law. However, these wage increases have
with the Drug Free Workplace Act, as well as the practicality implications for employers in the automotive industry, even if
of a zero-tolerance policy for off-duty marijuana use in a tight the increase does not directly impact their workforce.
labor market where employees and applicants are more and
more likely to engage in some level of marijuana usage. Retention and hiring of workers in an already tight labor
In this complicated and changing environment, employers market may prove increasingly difficult given that the gap
should ensure that their policies regarding drug testing between minimum wage and the wages paid to automotive
comply with the laws of the states in which they operate, are industry production workers is shrinking in some places.
clear and enforced consistently. Additional consideration is Employees, who can get nearly the same wages for less
obviously needed for unionized facilities, including looking physically demanding work, or positions with more attractive
closely at applicable collective bargaining agreements, schedules, may choose to leave the demands of the
and understanding that labor arbitrators often view off- automotive industry for other employment options. As a
duty conduct differently than workplace misconduct. In result, employers should analyze their competition for labor
states that require accommodation, if an employer wishes and determine whether any minimum wage increase may
to maintain a zero-tolerance drug free workplace policy, make retention and recruiting more difficult.
it should consider identifying and developing a legally
defensible business justification for why it is unreasonable to The challenge is that automotive employers need to retain
accommodate off-duty marijuana use. This will require the employees to decrease the burden on hiring and training, and
employer study the science of medical marijuana usage. If to improve productivity in the plant setting. While we can only
no such legally defensible business justification exists for the do so much to increase starting wages, automotive employers
business, the employer may consider modifying its policy. must do all they can to make work in a plant setting as
The bottom line is that employers should focus on workplace attractive as possible. This means that employers should look
conduct – because they can always deal with specific instances at their health and welfare benefits programs and highlight
of job impairment related to an employee’s drug or alcohol use. to employees, temporary workers, and potential candidates
Safety and productivity should remain the overarching goals to what those benefits are. Focusing on the on-boarding process
dictate decisions regarding employee marijuana and drug use. and developing a team approach to selection and retention of
the best workers is also a sound approach. There is no magic
10 https://www.michigan.gov/lara/0,4601,7-154-11472-492482--,00.html
© 2020 Foley & Lardner LLP | 7
formula here, but employers that are more successful seem to Both changes continue the NLRB’s trend of opinions that
foster a sense of belonging and commitment that results in a tend to strengthen employer’s rights and undo union-friendly
more cohesive employee team. changes that took place during the Obama era.
3. Changes to NLRB Standards and Priorities Summary
Finally, this year has seen many changes in the Automotive employers will continue to face an evolving
governmental oversight of union workplaces that have legislative landscape in 2020 that will impact workforces.
continuing implications for all employers. Changes to NLRB Employee lawsuits, governmental charges and labor
standards and priorities will continue to affect unionized and grievances are not going away any time soon. Employers
non-unionized employers through 2020. On December 23, will still must deal with regulatory issues to make sure their
2019, the Board issued a new opinion that lowers the bar operations comply with federal and state laws, all with the
for deferring cases to the grievance procedure, returning backdrop of more liberal drug laws permitting recreational
the standard to one that was in effect prior to an Obama- drug use.
era opinion that made the deferral standard more onerous
for employers. As a result, it is now easier for employers to At the same time, wages are increasing and retaining the
request that an NLRB charge that is related to a grievance best and brightest will remain challenging unless wage rates
be stayed during the course of the grievance procedure. are competitive, and employees understand and appreciate
In addition, the Board will be more likely to defer to the the value of their contributions. And while the NLRB and
outcome of the grievance procedure rather than engaging other governmental agencies may be recognizing more
in its own investigation and determination of the merits of employer-friendly enforcement protocols, enforcement
the charge and the change will apply retroactively to any agencies like the NLRB, the EEOC, the U.S. Department of
charges currently pending. This is a good development for Labor, and state agencies are still very active in enforcing the
automotive employers because they can more easily defend statutes with which they are charged.
employee claims in the private arbitration context rather than
The examples in this paper highlight just some of the
before a more public governmental agency.
challenges facing employers in the automotive industry in
Also, in August 2019, the NLRB provided guidance 2020, where vastly differing state laws, frequently changing
regarding employers’ ability to require employees to sign standards, and a heightened awareness of employment
arbitration agreements in the context of a class action related issues make practicing employment law anything
lawsuit. The NLRB concluded that (1) employers can but routine. Be sure to analyze decisions and policies and
require employees to sign modified arbitration agreements involve legal counsel and human resources professionals as
in response to employees opting into a collective action you navigate the rugged terrain this decade.
under the Fair Labor Standards Act (FLSA) or corresponding
state wage laws; and (2) employers can require that the
employees sign the modified agreement or face termination.
However, the NLRB emphasized that employers are still not
permitted to take adverse action against employees purely
for participating in a class action.
© 2020 Foley & Lardner LLP | 8Recent Government Announcements Confirm
Importance of International Regulatory Compliance
for Automotive Companies
By Greg Husisian | Chair, International Trade & National Security Practice, Partner
and Jenlain Scott, Associate
Over the last three years, the current administration has chain due diligence, as well as a special advisory from the
imposed the largest export controls penalty, the second- Department of Homeland Security on supply chain due
largest economic sanctions penalty, and four of the ten diligence and compliance best practices.
largest anti-bribery penalties – of all time – signaling that
compliance with U.S. international regulations has never All automotive companies would do well to review a January
been more important. 2019 OFAC settlement with a Californian cosmetics
company, e.l.f. Cosmetics, Inc. (ELF), for alleged violations
Automotive companies that source, operate, or sell abroad, of the North Korean Sanctions Regulations. This settlement
for instance, face significant regulatory risk. Doing business occurred after ELF voluntarily reported the “unknowing”
in the Middle East, Africa, Latin America, and Asia present importation of 156 shipments of false eyelash kits from
issues under the Foreign Corrupt Practices Act (FCPA) two suppliers in China, the contents of which contained
(frequent bribery requests), economic sanctions from the materials independently sourced by these suppliers from
Office of Foreign Assets Control (OFAC) (limitations on North Korea. The only “red flags” that the U.S. Government
dealings with Iran, Syria, Russia, Venezuela, and other highlighted in support of the penalty were that the U.S.
sanctioned countries), and export controls (restrictions on company sourced from China (which was described as a
shipments of U.S.- origin goods to embargoed or restricted country that frequently deals with North Korea) and that
countries or persons). Iran presents its own unique concerns ELF had conducted insufficient due diligence. OFAC, in
as the U.S. government maintains sectoral sanctions that effect, was treating the lack of supply chain due diligence
specifically restrict the ability of U.S. companies to deal with and compliance measures as equivalent to knowledge of the
the Iranian automotive sector. alleged violations.11
This landscape makes it essential that global automotive The U.S. Government highlighted “two primary risks” for
companies take steps to identify, manage, and minimize international sourcing and supply chains: (1) the inadvertent
their international regulatory risk. Recent guidance from the sourcing of goods, services, or technology from North Korea;
U.S. government underscores that any such risk analysis and (2) the presence of North Korean citizens or nationals
must extend to automotive supply chains as well. in companies’ supply chains, whose labor generates
revenue for the North Korean government.” To avoid these
While automotive companies have traditionally focused on alleged violations, the U.S. Government concludes that
sales-side issues to evaluate international regulatory risk “[b]usinesses should closely examine their entire supply
– assuming that these areas left them most vulnerable – chain(s) for North Korean laborers and goods, services, or
the U.S. government has recently sent several messages technology, and adopt appropriate due diligence best
detailing an expectation that companies subject their entire
supply chain to extensive due diligence, based on state-of-
the-art compliance measures. These messages include the
issuance of an unusual briefing by the Departments of State,
Treasury, and Homeland Security on the need for supply
© 2020 Foley & Lardner LLP | 9practices,”12 including what OFAC referred to as “full- surprisingly short time. Thus, to stay one-step ahead of the
spectrum” due diligence on suppliers operating in high-risk U.S. government’s increasingly aggressive enforcement
environments. The same reasoning would apply equally of export laws and international conduct, any automotive
for other strict economic sanctions, such as those in place company that has not yet conducted a risk-assessment
against Iran, Russia, Venezuela, or other countries. or recently reviewed the effectiveness of its international
compliance efforts should consider doing so – today.
For automotive companies, many of which often rely on far-
flung supply chains, the warning from the ELF settlement is If you would like a sample risk assessment
clear: the U.S. government expects companies to conduct questionnaire, or a guide to compliance best practices
due diligence and apply know-your-supplier compliance for automotive companies, please contact the authors
measures for all purchases from high-risk regions, like China at ghusisian@foley.com or 202.945.6149, or at
and Mexico. jscott@foley.com or 202.295.4001.
A well-run compliance program, however, is not something
that comes about by accident – particularly in the
international realm. Natural changes in the organization’s
footprint, evolving methods of operation, changes in the
law (such as the new sanctions on Iran), and shifts in the
enforcement aims of government authorities all conspire
to make even the best compliance program obsolete in a
12 Dep’t of Treasury, Dep’t of State, and Dep’t of Homeland Security,
“North Korea Sanctions & Enforcement Actions Advisory” (July 23,
2018), https://www.treasury.gov/resource-center/sanctions/Programs/
Documents/dprk_supplychain_advisory_07232018.pdf.
© 2020 Foley & Lardner LLP | 10What We Know Now – Lessons from 2019 to
Better Manage Data Privacy in 2020
By Chanley Howell, Partner, Tom Chisena, Associate, and Chloe Talbert, Law Graduate
Over the last year, technology innovations in the automotive and the protection of personal information will become an
industry continued to be a boon for both drivers and important consideration for consumers in the marketplace.
manufacturers alike, particularly in the area of connected Regulatory compliance likely is the first step to building
cars and autonomous vehicles. However, with big gains in the kind of culture and reputation around data privacy that
technology come big data, and 2019 delivered the next big companies will need to gain and maintain consumer trust
wave of data privacy and security laws to regulate that data. moving forward.
This past year alone, we saw many jurisdictions at both
the state and national level (including California, Maine, The complexity of the regulations and their varying
Nevada, New York, Massachusetts, Texas, Kenya, and geographic scope and industry applicability, as well as the
Thailand) introduce or implement new privacy and security business and operational burdens they may impose, make
regulations that have or would impact automotive industry navigating data privacy compliance and security practices
consumers and other users of connected cars. This new difficult. However, we outline below some guideposts that
wave of regulation comes on the heels of the European are emerging in this area as your company thinks about
Union’s General Data Protection Regulation (the GDPR) how best to comply with regulation as well as secure and
implemented in May 2018. maintain consumer trust as data privacy laws and consumer
expectations continue to evolve.
But it’s not just new laws and regulations pressuring
automotive industries on their data management practices. Data Privacy and Compliance Issues and Best Practices
Consumers themselves are also a driving force of privacy We now know that regulators and consumers are aligned
scrutiny both inside and outside of the automotive industry. with respect to protecting consumers’ personal information,
As automotive technologies become more personal and data, and privacy and are looking to hold companies
targeted, the individual becomes more vulnerable, and accountable for providing those protections. This shift
consumers are now expecting that their vehicle’s data towards prioritizing privacy is creating new challenges as
privacy and security protections match the functionality and companies work to strengthen their data privacy and security
advances in smart technology. While compliance with data to comply with regulation and consumer expectations.
privacy regulations can create new business and operational However, this shift has also created an opportunity for
challenges, noncompliance can result in harsh monetary companies to become industry leaders in this area, and
and legal penalties, including steep fines and potential knowledge of the current issues and best practices to
civil liability. A potentially even greater consequence of address them is the first step towards setting that precedent.
noncompliance could be the loss of consumer trust. Just
like a cybersecurity breach may signal to consumers that 1. Navigating and Understanding Applicable Law
their data is not safe, a company’s breach of applicable data The number of new privacy laws and their varying scope
privacy laws could send a similar message. As consumers makes compliance particularly challenging for companies
continue to prioritize privacy, companies that cannot keep with diverse or widespread operations, as it can be
up with consumer expectations or regulatory requirements difficult to establish exactly which regulations apply,
could lose reputation and goodwill in the marketplace. depending on companies’ geography or industry, and on
Accordingly, we expect to see in 2020 that a company’s how, why, and what kind of data companies are dealing
culture, policies, and practices regarding data privacy with. Understanding how companies’ operations fit into
© 2020 Foley & Lardner LLP | 11these privacy schemes is crucial for continued regulatory 3. Forecasting Operational and Business Requirements
compliance. Implementing and fostering a strong unified Companies need to be proactive as consumer demand
privacy and security program can help companies navigate for stronger data privacy and security protections and the
this web of regulation, and create a strong foundation that regulatory response continues, and should start by analyzing
can provide consumers the security they demand while still their compliance requirements. In adding additional
maintaining the flexibility to adapt to the specific needs of a protections and control for consumers, privacy laws create
particular jurisdiction or regulation as data privacy compliance operational and technological burdens on companies. For
requirements expand and evolve. A strong unified privacy example, notice and request for information requirements
effort may also engender trust and security in consumers. may require additional employees and training, and
companies’ systems and technical practices may need to
2. Third-Party Risk Management be updated to implement and support required protections
Third parties can create additional liability for companies like data anonymization and aggregation. Companies
and consumers. While companies may implement should stay up to date on emerging privacy and security
internal measures to build consumer trust and maintain issues, and should continue to prepare their operations for
regulatory compliance, they could risking losing that trust upcoming regulations or protections. Companies should also
if they engage with a third party that fails to comply with look beyond the letter of the law, and should forecast their
applicable data privacy laws or otherwise puts consumer privacy and security practices in response to technological
data at risk. Companies should incorporate data privacy innovations, as they will have the greatest understanding of
and security review into their due diligence when engaging what risks the technologies may pose to privacy and how
with vendors or other third parties, especially those that deal best to respond. Companies should maintain an offensive
with consumers’ personal information. Companies should strategy when it comes to privacy, as playing catch-up could
review third parties’ data privacy and security practices to result in noncompliance.
ensure that they align with their own and are compliant with
applicable regulations. In the event that third parties will deal 4. Consumer Expectations and Securing Consumer Trust
with consumers’ personal information, they should be bound As consumers become more aware of their data and
to maintain compliance and meet companies’ standards of more concerned with privacy, they are demanding greater
privacy and protection, and be held responsible if they fail transparency, protection, and control over personal
to do so. Transparency surrounding companies’ use of third information. Further, how companies meet these demands
parties may additionally bolster consumer trust by mitigating is becoming a priority for consumers in the marketplace,
the risk of an unknown and by shifting some of the and companies that do not earn the trust of consumers with
burden of compliance or customer concern. This could be regard to privacy may start to fall behind. Companies should
particularly important for third parties with which companies make privacy a priority, and make that priority obvious
have ongoing relationships or that deal with particularly to consumers. With this shared interest as a foundation,
sensitive personal information. Companies should disclose companies should additionally be transparent about their
relationships with these third parties up-front, and reference privacy policies and practices and should engage with
their privacy policies or other relevant data privacy and consumers’ questions or concerns. Cultivating this kind of
security documentation for consumers to review. Where trust is crucial as connective and autonomous innovations
appropriate, companies should additionally provide relevant and privacy concerns continue to grow.
contact information for these third parties, so consumers
can address any questions they may have regarding privacy
policies and practices or voice specific concerns regarding
data or personal information in a third party’s possession.
© 2020 Foley & Lardner LLP | 125. Remember that Cybersecurity ≠ Compliance Conclusion
While compliance with data privacy regulation is necessary, Consumers and regulators appear to now agree on the need
it may not always be sufficient to protect data. Third parties for stronger data privacy protections, as connectivity and the
may continue to pose cybersecurity risks, as discussed personalization and automation of technologies continues
above, and while compliance with notice and opt-out/ and as more and more personal information is collected
opt-in requirements implemented by privacy laws may about users. This continues to place added pressures on
give consumers more control over and information about the automotive industry as a whole. Virtually all facets of the
authorized uses or disclosures of their data, it does not organization, and sometimes third parties as well, will need
protect them from unauthorized uses or disclosures. to be involved to properly plan, implement protections, and
Companies should continue to work to implement security prepare for compliance with new and expanding regulations
measures and practices that work to provide the best and consumer demands. There is an opportunity to lead the
cybersecurity, including eliminating vulnerability early at the pack in this evolving area, and taking action now will give
design stage and continuously monitoring and preparing for your company a head start as 2020 arrives.
new or inevitable security threats.
© 2020 Foley & Lardner LLP | 13The USMCA, with the December 2019 updates, will soon
take effect. Here’s what to expect.
By Alejandro Gomez, Partner, Marco Najera, Partner and Fernando Camarena, Partner
1. Updated USMCA will pass But there were other important changes stemming from the
While the U.S.-Mexico-Canada Agreement (USMCA) was December 2019 update. In addition to the aforementioned
signed on November 30, 2018, subsequent pressure from provisions for the 70% requirement on steel and eventually
U.S. House of Representatives prompted major updates to aluminum, Mexico must comply with newly passed labor
the agreement and a USMCA´s Protocol of Amendment was law provisions. We believe Mexico has successfully shown
signed on December 10, 2019. The amended USMCA is on its commitment to properly enforce changes included both
track to enter into force around mid-2020 -- three months in USMCA and its update, and in resisting tougher U.S. and
after all parties have completed their internal ratification Canadian oversight within its borders pertaining freedom of
procedures, with exclusively Canada still waiting on association and collective bargaining, though both countries
Congressional approval. have a facility-specific, rapid-response revision mechanism,
which may be revised by a panel of labor experts. The
The USMCA presents some challenges for the automotive
burden of proof is on the defending party to demonstrate
industry. Increased percentages in Regional Value Content
that a violation does not affect trade or investment between
(RVC) will be required -- and the percentages will continue
the parties. Additionally, the position of Mexico-based
increasing for a number of years -- a new Labor Value
Labor Attachés was created, which will provide firsthand
Content (LVC) element will be compulsory, and auto parts
information regarding Mexico´s labor practices.
are meticulously divided in several “tables” with varying and
increasing percentages to qualify as originating. Additionally, Regarding environment concerns, the burden of proof
beginning seven years after the amended USMCA enters shifts for the defending party to demonstrate that an
into force, a passenger vehicle, light truck or heavy truck will environmental violation does not affect trade or investment
be considered as made in the region only if, during the prior among the parties – just as it does in labor matters. Parties
year, at least 70% of the vehicle producer´s purchases of must implement the respective obligations under their
steel qualify as originating as well. Regarding aluminum, 10 multilateral environmental agreements. Also, the position
years after entry into force of the amended agreement, the of Environmental Attachés was created to monitor Mexico´s
parties -- the U.S., Canada and Mexico -- will determine how environmental enforcement.
to consider it as originating. Updated USMCA guarantees regarding state-to-state dispute
But despite the RVC and LVC requirements, as well as those settlement provisions mean a party may not block the
pertaining auto parts, being known and unchanged for more formation of panels and, pertaining to intellectual property,
than a year, many companies could end up determining, parties agreed to remove the mandatory 10-year data
on an expedited basis, how to cope with a complex, multi- protection for biologics, and to individually maintain their
tiered, and likely cross-border supply chain. domestic policy priorities.
We also should not lose sight that a company’s compliance As to investment-recipient “winning” countries within
or lack thereof with USMCA´s Rules of Origin (ROO) may USMCA, it is not for governments to brag about it
bring rather different results, from including exemption beforehand; likely results will be a sum of individual OEM´s
of import duties on one end, to paying 2.5% for certain model-based decisions and corresponding multiplying
automobiles, or 25% for certain vehicles for transportation of effects in production chains. We believe, though, that
goods under World Trade Organization rules to the other. Mexico will surely receive greater investments regardless of
© 2020 Foley & Lardner LLP | 14the LVC requirement because the party that adds lower costs
to a specific, model calculations will always be considered. USMCA´s Rules of Origin (ROO)
Additionally, non-USMCA located suppliers will move to the ■ Following slides present “Exact date of 2020”
country to continue being considered by an already defined USMCA approval as starting point, which
inventory of OEMs in Mexico, and the country will benefit triggers +1, +2, +3… year periods.
from a demographic boon during the next several years ■ Exclusively enforcement of 70% steel
that will help neutralize the dwindling U.S. population, and requirement postponed for 7 years. Rest of
necessarily, its workforce. following details, known for +1 year.
We should again remind ourselves that the forthcoming ■ The secret lies in finding your sweetspot in
USMCA approval by the three parties will provide much- following slides as your company will NOT have
needed certainty and stability for North America to build to comply with ALL of the incoming relevant
upon individual strengths and effectively compete globally as rules.
a single trading bloc. ■ For full summary of USMCA´s ROO for motor
vehicles and auto parts visit:
2. Is your company prepared to comply with https://www.foley.com/en/insights/
USMCA´s ROO for motor vehicles and auto parts? publications/2018/11/understanding-and-
What was unchanged from the original USMCA is certainly coping-with-the-usmexicocanada-a
relevant to the automotive industry. The following charts are
a summary of the rules, percentages and requirements that
are going to be enforceable in a few months’ time.
This summary simplifies the amended USMCA´s Chapter 4,
Rules of Origin provisions to manufacture motor vehicles and
auto parts in North America.
© 2020 Foley & Lardner LLP | 151.Rule of Origin for Motor Vehicles
Regional Value Steel & Aluminum Labor Value content (LVC)
Content (RVC) $16 USD + per hour
Passenger
vehicles Manufacturing Tech Assembly expenditures (engine
expenditures R&D, IT transmission, or adv. battery)
Light
trucks
Passenger
vehicles
Heavy
trucks
Light &
ROO sweetspot to Heavy
produce Passenger trucks
Vehicles
Other
vehicles
1.Rule of Origin for Motor Vehicles
Regional Value Steel & Aluminum Labor Value content (LVC)
Content (RVC) $16 USD + per hour
At least 70% prior
Exact date of year purchases
Passenger 2020: 66% originating, either
vehicles via: Manufacturing Tech Assembly expenditures (engine
+1 year: 69% expenditures R&D, IT transmission, or adv. battery)
- Direct purchases
+2 years: 72%
- Service centers
+3 years: 75%
- Suppliers
Light Exact date of
- Averaging: calendar & model 2020: 30% 15%
trucks
-Transition period up to +5 years (may benefit Passenger = + 10% + 5%
vehicles +1 year: 33% 18%
up 10% production in past year)
+2 years: 36% 21%
+3 years: 40% 25%
Exact date of
2020: 60% - Averaging: model only
Heavy +4 years: 64%
trucks +7 years: 70%
Light & Immediately: 30% = 15% + 10% + 5%
- Averaging: calendar & model Heavy
trucks
- Transition period up to +7 years (no 10% limit) - Averaging: model only
Other
vehicles Immediately: 60% or 62.5%, depending on type
© 2020 Foley & Lardner LLP | 162.Rule of Origin for Auto Parts
Table A-1 Table A-2 Table B Table C
Super core parts Parts, and Components Principal parts Complementary Parts
to produce them:
Passenger
vehicles
Light
trucks
Sweetspot shifts to selecting proper
Table D Table E
Table where Auto Part will be classified Principal parts Complementary parts
and should thus comply-with.
Heavy
trucks In here, either Table A-1 or Table B to
produce Passenger Vehicles
Other
vehicles
Replacement Parts as Stand-Alone
2.Rule of Origin for Auto Parts
Table A-1 Table A-2 Table B Table C
Super core parts Parts, and Components Principal parts Complementary Parts
to produce them:
Exact date of 2020: 66% net - Engine Exact date of 2020: 62.5% nc / Exact date of 2020: 62% nc
Passenger
cost (nc) / 76% transaction 72.5% tv / 72% tv
Vehicles - Transmission
value (tv)
- Body and chassis +1 year: 65% nc / 75% tv +1 year: 63% nc / 73% tv
+1 year: 69% nc / 79% tv
- Axles +2 years: 67.5% nc / 77.5% tv +2 years: 64% nc / 74% tv
+2 years: 72% nc / 82% tv - Suspension system
Light +3 years: 70% nc / 80% tv +3 years: 65% nc / 75% tv
trucks - Steering system
+3 years: 75% nc / 85% tv
- Adv. Batteries
Table D Table E
- Averaging: calendar & model Principal parts Complementary parts
Exact date of 2020: 60% nc / Exact date of 2020: 54%
Heavy 70% tv nc / 64% tv
trucks
+4 years: 64% nc / 74% tv +4 years: 57% nc / 67% tv
+7 years: 70% nc / 80% tv +7 years: 60% nc / 70% tv
Other
Immediately: 60%. Averaging: calendar only
vehicles
Replacement Parts as Stand-Alone Subject to “ordinary” ROO, not as per above
© 2020 Foley & Lardner LLP | 173. New labor provisions Additionally, the Mexican Income Tax Law and the Value-
In anticipation of USMCA´s approval, Mexico recently passed Added Tax Law were amended to include rules to cover the
significant legal provisions dealing with labor.13 digital economy. These rules apply to Mexican individuals
(tax residents) that sell goods or provide services through
Possible impacts to employers derived from relevant
digital platforms and to non-Mexican residents (with no
changes are as follows: as workers become aware of legal
permanent establishment) for digital services deemed to be
modifications, they will likely question the status quo of their
provided in Mexico.
unions; “protection” labor contracts (i.e., those signed with
unions friendly to employers) will likely face challenges and, To strengthen outsourcing activities rules, taxpayers who
on a company-by-company basis, be replaced by other receive such services must withhold a portion of the Value-
contracts or ratified; depending on unions’ specific offers, Added Tax with respect to the outsourcing payments they
workers would decide to stay in them, leave or form / join a make. Criminal Tax reform was also passed so that, in
new union; many older union leaders will likely be replaced certain cases, the sale and deduction of fake invoices could
by new ones who seek to address what is or may be bringing be deemed as similar to organized crime.
restlessness to the workforce; unions may increase demands Finally, there are bills in the Mexican Congress that, if
for economic support – a common practice in Mexico – due approved, would result in more complex rules to further
to the expansion of their internal workloads; and human regulate outsourcing activities in Mexico, both from a labor
capital areas of companies, as well as outside counseling, and tax perspective. Companies should monitor these
will need to be strengthened. possibly-incoming new rules as they could entail substantive
changes in their structures.
4. New 2020 tax law
Even though unrelated to the amended USMCA, a 5. Anti-corruption and product-safety provisions
comprehensive 2020 Mexican Tax Reform aimed at Additionally, companies doing business in Mexico should not
increasing collections was passed and, with most of its lose sight of already existing, yet not as-known, obligations.
provisions taking effect January 1, companies doing They should be careful in adopting anti-corruption and
business in the country need to be aware of relevant integrity policies to meet Mexican anti-corruption rules
changes.14 Approved new rules follow in many cases the as well as the U.S. Foreign Corrupt Practices Act (FCPA).
recommendations of the OECD´s Base Erosion and Profit Sanctions for engaging in corrupt practices in Mexico have
Shifting Project Final Report (BEPS). severe economic and criminal consequences; for example,
A very broad General Anti-Avoidance Rule (GAAR) will companies and individuals can be sanctioned with fines
allow the Mexican Treasury to recharacterize transactions of up to two times the acquired benefits, damages, and
in which lack of business purposes are deemed to exist. lost profits, as well as temporary disqualification from
Also, new deduction limits in the case of payments to low participating in public bids. Implementing anti-corruption
tax jurisdictions, as well as hybrid structures and interest, and integrity policies conforming with both jurisdictions,
were implemented. Changes to the definition of permanent as well as continuing anti-corruption training programs to
establishment will make Mexican legislation more aligned employees, are effective tools to mitigate associated risks.
with OECD rules. Controlled foreign corporation (CFC) rules
Entities doing business in Mexico should be also careful in
and the regime applicable to foreign pass-through entities
complying with international (e.g., U.S.) and Mexico safety
were subject to substantial changes. The shelter Maquiladora
standards to avoid potential risks of damage claims and
regime was also amended to include an indefinite duration,
class actions, as well as penalties and recall procedures
replacing its previous 4-year duration term.
that can be imposed by the Mexican consumer protection
agency (Profeco).
13 See Diario Oficial of February 24, 2017, October 30, 2018, and
May 1, 2018.
14 Diario Oficial of December 9, 2019
© 2020 Foley & Lardner LLP | 18You can also read
